Analysis: Once reliable technology sector drags down earnings

NEW YORK (Reuters) - This earnings season, the U.S. technology industry is in an unusual position - dragging corporate America down, rather than lifting it up.

Wall Street expects the tech sector's fourth-quarter earnings to be down 1.1 percent from a year ago, the first drop since the third quarter of 2009, even though overall S&P 500 profits are still forecast to show growth, according to Thomson Reuters data.

Chip companies are expected to be among the worst performers because of softer-than-expected personal computer sales. Weak overseas demand and worries about the U.S. fiscal crisis have also likely caused corporations to put off IT spending.

"The lack of economic growth we've seen in Europe, the deceleration of emerging markets - that has put a significant amount of pressure, particularly on technology," said Omar Aguilar, chief investment officer for equities at Charles Schwab Corp, in San Francisco.

Tech stocks have struggled recently and further weakness could dent the bullish 2013 forecasts many strategists have for the U.S. stock market. But some investors and analysts say weak fourth-quarter numbers have already been baked into many tech stock prices and valuations are attractive.

Analysts at Bank of America Merrill Lynch wrote in a note this week that tech stocks are undervalued by about 32 percent, more than any other sector, based on current forward price-to-earnings ratios. Every tech industry except IT services is trading well below historical levels, the note said.

Within tech, "you're finding a lot of cash-rich companies trading at reasonably cheap multiples. So to value investors like us ... it starts to seem intriguing," said Eric Kuby, chief investment officer at North Star Investment Management Corp in Chicago, whose firm owns Microsoft Corp and Intel Corp.

It is unusual for tech, the largest of the Standard & Poor's 500 index's 10 industry sectors and accounting for nearly 23 percent of earnings, to underperform. Tech has been in the top half of S&P sectors for the last four earnings periods and it has posted stronger profit growth than the overall market 83 percent of the time in the last 10 years, according to Thomson Reuters.
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